PETALING JAYA: Plantation companies’ earnings are expected to be lower in 2024 as there are expectations of an oversupply situation which will push down crude oil prices (CPO).
Hong Leong Investment Bank (HLIB) Research’s CPO assumption for 2023 is RM5,500 per tonne and RM4,500 per tonne. For 2024, the research house lowered its CPO price assumption to RM3,800 per tonne from RM4,500 per tonne earlier and its rationale is that supply prospects will continue to improve into 2024 and this will be a drag for CPO prices.
Following the downward revision, HLIB Research lowered its financial year 2024 earnings forecast for plantation companies under its coverage.
It lowered its target price (TP) on plantation stocks under its coverage by 5.9% to 33.1%.
It has downgraded its ratings on FGV Holdings Bhd and Sime Darby Plantations Bhd to “hold’’ from “buy” earlier.
Using historical price-to-book value (PV) as a gauge (as book value is always more stable relative to earnings, particularly when CPO price remains volatile), it noted that all plantation stocks under its coverage except for Hap Seng Plantations Holdings Bhd were already trading at discount to their historical five-year average PV.
It maintains an “overweight’’ stance on the sector, supported by an anticipated recovery in CPO. For exposure, it prefers integrated players such as KL Kepong Bhd. It has a “buy’’ call on the stock with a TP of RM26.54 a share.
It also prefers IOI Plantations Bhd (buy; TP: RM4.36 a share) over purer upstream players, as earnings of integrated players tend to be better insulated amidst volatile palm product price trends.
The research house is of the opinion that while Indonesia’s move to flush out palm oil inventories will likely suppress near term CPO price, the recent severe CPO price decline is overdone as supply prospects of major vegetable oil remains uncertain and there are several positive demand catalysts.
The report said CPO price has fallen by about 35% from its peak of RM8,074 per tonne in early March this year, averaging at RM6,300 per tonne in first half of 2022, due to several factors including rising palm oil exports from Indonesia following the government’s move to flush out palm oil inventories accumulated since March.
There is improved supply visibility on major vegetable oils, easing concerns on labour shortage in Malaysia, seasonal uptrend in palm output cycle; and recent aggressive interest rate hikes by the US Federal Reserve, which have dampened overall market sentiment
Source: https://www.thestar.com.my/business/business-news/2022/07/13/oversupply-may-dampen-earnings-of-companies